CIS explained for subcontractors and contractors: rates, returns, statements and the mistakes HMRC fines

The Construction Industry Scheme (CIS) is simple in principle and fiddly in practice. Contractors deduct tax from payments to subcontractors and pay it to HMRC; subcontractors get credit for it against their own tax. Get it wrong as a contractor and the penalties are automatic. Get it wrong as a subcontractor and you lend HMRC money for a year.

Who it applies to

A contractor is anyone who pays subcontractors for construction work: builders, developers, and also businesses outside construction that spend more than £3 million on construction in a 12-month period. A subcontractor is anyone paid by a contractor for construction work: sole traders, partnerships and limited companies alike. Many firms are both.

Construction work covers almost everything: site preparation, building, alteration, repair, demolition, installation of heating, lighting, power and water, painting and decorating. It excludes architecture and surveying, scaffolding hire without labour, carpet fitting, and the manufacture of materials off site.

The three rates

• 20% for subcontractors registered with HMRC under CIS
• 30% for subcontractors who are not registered, or cannot be verified
• 0% (gross payment status) for subcontractors who have applied and passed the turnover, business and compliance tests

Deductions apply to the labour element only. Materials the subcontractor paid for directly are excluded, as is VAT. A subcontractor invoice should therefore show labour, materials and VAT as separate lines, and the contractor deducts from the labour figure.

Gross payment status

Worth applying for once your turnover allows. The test is net construction turnover of at least £30,000 per individual, partner or director, or £100,000 for a company as a whole, over the last 12 months, plus a clean compliance record on returns and payments. HMRC reviews it annually, and a late return can lose it.

What contractors must do

• Register as a contractor before paying the first subcontractor
• Verify every new subcontractor with HMRC before paying them, which tells you the rate to deduct
• Deduct at the right rate from the labour element, and pay the deductions to HMRC by the 22nd of the following month (19th if paying by post)
• File a monthly CIS return by the 19th of each month listing every subcontractor paid, even if the amount deducted is nil. A nil return is still required if you have paid nobody, unless you have told HMRC you are inactive
• Give each subcontractor a payment and deduction statement within 14 days of the end of the tax month

Late returns attract automatic penalties starting at £100 and rising with time, per return.

What subcontractors should do

Register for CIS so you are deducted at 20% rather than 30%. Keep every deduction statement. If you are a sole trader or partnership, the deductions come off your self assessment bill in January, and any excess is refunded. If you are a limited company, you set the deductions against your PAYE and CIS liabilities monthly through the employer payment summary, and reclaim any balance after the tax year ends. Companies that forget this are the ones with five-figure refunds sitting at HMRC.

CIS and the VAT reverse charge

Since March 2021 most VAT-registered CIS supplies between businesses fall under the domestic reverse charge, so the subcontractor's invoice shows no VAT charged and the contractor accounts for it. The two schemes interact on every invoice; our guide to the VAT reverse charge covers the wording.

Keeping it straight without an accountant on speed dial

The practical problem is the volume: a subcontractor invoice every week, each needing the deduction calculated, the statement issued and the return line recorded. EstiMate's accounts record each subcontractor payment with its CIS deduction when you log the invoice, produce the monthly return figures, and show subcontractors their deduction statements. At year end the CIS suffered and CIS deducted both land in the right boxes.